Ducommun Incorporated

Thank you all for standing by and welcome to the conference call entitled Q3 2021 Do Common Earnings Conference Call. At this time, all participants are in a listen-only mode. Near the end of today's session, we will have a question and answer session. To ask a question over the phone by that time, you may press the star key followed by the number one. Please also note that today's call is being recorded. I'll now hand the call over to your host. the Investor Relations Advisor of Decommon Incorporated, Chris Witte. Sir, you may now begin.

Thank you, and welcome to Decommon's 2021 Third Quarter Conference Call. With me today are Steve Oswald, Chairman, President, and CEO, and Chris Wampler, Vice President, Chief Financial Officer, Controller, and Treasurer. I'm going to discuss certain limitations to any forward-looking statement regarding future events, projections, or performance that we may make during the prepared remarks or the Q&A session that follows. Certain statements today that are not historical facts, including any statements as to future market conditions, results of operations, and financial projections, are forward-looking statements under the Private Securities Litigation Reform Act of 1955 and are, therefore, prospective. These forward-looking statements are subject to risks, uncertainties, and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. In addition, estimates of future operating results are based on the company's current business, which is subject to change. Particular risks facing to common include, among others, the cyclicality of our end-use markets, the impact of COVID-19 on our operations or customers, the terms of and our ability to complete a potential sales leaseback transaction, the level of U.S. government defense spending, timing of orders from our customers, legal and regulatory risks, management changes, the cost of expansion and acquisitions, competitions and disasters, natural or otherwise. These risks and others are described in our annual report on Form 10-K filed with the SEC and our other forward-looking statements which are subject to those risks. Statements made during this call are only as of the time made, and we do not intend to update any statements made in this presentation except if and as required by regulatory authorities. This call will also include non-GAAP financial measures. Please refer to our filings with the SEC for a reconciliation of the GAAP to non-GAAP measures referenced on today's call. We followed our 2021 third quarter Form 10-Q with the SEC today. I would now like to turn the call over to Mr. Steve Oswald for a review of the operating results. Steve?

Thank you, Chris, and thanks, everyone, for joining us today for our third quarter conference call. As usual, I will give an update on the current situation at the company, after which Chris Wample will review our financials in detail. The company remains focused, first and foremost, on the health and safety of our employees. The team has done an excellent job with the safety protocols put in place since March of 2020. We continue to follow our best practices, aligning with health authorities throughout our many operations. The total number of cases is roughly 279 since the beginning of the pandemic. and within the company who had 65 cases in Q3 of 2021. I also want to mention the company will be following the OSHA vaccination requirements, and we are currently awaiting those rules from the government. As mentioned in the press release, the Commons' third quarter results were strong. The company delivering year-over-year revenue of 9%, all organic. The company's defense business delivered another solid performance The commercial business showed year-over-year revenue growth for the first time since Q4 2019 in the quarter. The commercial aerospace markets are recovering, and we are seeing some bright spots. For example, Spirit Aerosystems was 5% of revenue for the quarter, and also going from a position of our 19th largest customer revenue in Q3 of 2020 to the 4th in Q3 of 2021. We were optimistic as well that the column will start seeing meaningful OEM bill rate increases for recent comments from Airbus and Boeing starting in 2022. In addition to revenue growth, we posted solid gross margins of 21.6%, along with adjusted EBITDA margins of 14.6%. The team also posted adjusted operating income margins of 9%, which is excellent progress As we continue to build our track record of delivering impressive financial results in any environment. The quality of earnings was high as well. The company reaching GAAP diluted EPS of 78 cents a share versus 54 cents a share for Q3 2020. A 44% increase. An adjusted diluted EPS of 83 cents a share versus 69 cents in 2020. Those numbers reflect the return to revenue growth commitment we had anticipated and communicated mid-last year. This is also a great story for our investors, as Q3 was also the second consecutive quarter of year-over-year revenue growth, with significant runway ahead. The company's third quarter revenue was higher with the commons commercial business, showing year-over-year growth the first time since Q4 2019 of 34%, and continued solid defense business versus prior year. Defense business revenues continue to show excellent progress on shipments and robust business development. The majority of gains in Q3 include the F-18, F-35, UAVs at General Atomics, which more than doubled, Raytheon tow program, and other missile programs. Our approach to the market continues to be innovative products and processes that provide significant value to the defense customer. along with striving for consistent high levels of service. The current numbers and backlog shall continue to be rewarded for this strategy. I also want to mention, as in the past, the Raytheon Missile and Defense business and the progress since signing the Strategic Supplier Agreement with them in July of 2019. We have been hard at work in three areas, new programs, offloading, and share shift. I'm happy to report that 2021 will be a record year overall with this legacy Raytheon business growing from less than $90 million in 2020 to over $115 million in 2021, an increase of more than 25% with much more runway ahead. Another highlight of this partnership occurred in Q3. As a common one, a contract with Raytheon will now be supplying critical circuit card assemblies to the SPY6 radar program with over a $15 million annual run rate. This is a major win for our defense circuit card business on a very prestigious program and a great example of our ability to help defense primes offload production and drive significant value for them with more opportunities ahead. In addition, I continue to be optimistic about defense opportunities for our company despite the overall industry challenges with examples like the SPY6 one just mentioned, GA becoming a larger customer, our newly developing Northrop relationship, and other revenue opportunities. In regards to the defense backlog, it remains strong, and ending Q3 with a backlog of $498 million. The commercial aerospace backlog also showed some signs of recovery, increasing sequentially from the second quarter for the second consecutive quarter from $276 million at the end of Q2 to $286 million at the end of Q3 2021, a very good sign. The total backlog was $836 million for the company, and it's a good number based on the environment. The company's cost actions are also continuing to pay dividends. You can certainly see, even before the pandemic, the company was working on initiatives to offset the 737 MAX. The effectiveness of our operations leadership and actions show in the solid gross profit margins and the very good operating income percentages along with the diluted EPS. I also want to mention our pricing efforts continue and are having a positive impact. In regards to the outlook, the significant backlog of defense and more momentum in commercial aerospace provide good revenue in Q4, and again in 2022. We estimate that revenue will remain strong in defense, but over the quarters ahead, we will see more and more commercial aerospace volume return to the economy. I want to make clear to our investors and our analysts, we are very well positioned with our high narrow body to wide body ratio for our business, and also as important, have the capacity, supply chain, and strong operating team to deliver in the forecasted rates ahead. We also remain active in the market for M&A, looking for new companies that fit our model, and believe this will only be an accelerator to higher results. Now let me provide some additional color on our markets, products, and programs. Beginning with our military and space sector, we posted third quarter revenue of $113.6 million, a slight increase versus 2020. The solid showing was from revenue on key defense platforms. As mentioned earlier, we saw increases in demand for F-35, F-18, UAVs, TOW, and other missile programs. The third quarter military and space revenue represented 70% of the Commons revenue in the period. We also continue to be very well positioned for further growth, as I mentioned earlier, across defense platforms over the next several quarters in all sectors, especially at Raytheon. And again, end of third quarter with a strong backlog of $498 million, which represents 60% of our total backlog. Within our commercial aerospace operations, third quarter revenue increased year-over-year to $41.2 million, driven mainly by bill grade increases on large aircraft platforms. And we're also seeing some good year-over-year growth of our business jet customers, both Gulfstream and Bombardier. Common Expects. a meaningful improvement in the market overall in 2022 and 2023, and the future, we believe, is very bright. The backlog within our commercial aerospace sector stands at roughly $286 million at the end of Q3, a slight increase sequentially compared to Q2 2021 and the second consecutive quarter of growth for the company. Before having Chris review our financial results, I want to mention that our three acquisitions since I joined the Commons, have all been winners for the company, our shareholders, and new acquisitions continue to be a very important component of our vision and strategic plan. Having said that, available capital is a critical catalyst, and therefore we've undertaken a review of our Southern California industrial legacy real estate portfolio. Industrial properties in Southern California, as in Seattle and other areas, are in extremely high demand. and the company recently initiated the marketing of one of our facilities as an expected sale-leaseback transaction. We anticipate signing and closing on this transaction in the next few months. This transaction is expected to generate in excess of at least $90 million of after-tax cash that we will then be able to deploy mainly for strategic acquisitions and debt repayment. We will also continue to evaluate additional sale leaseback opportunities as we move forward in California and are excited about the opportunity and the value we will create for the company and our shareholders. With that, I'll have Chris review our financial results in detail. Chris?